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Why It’s Time to Buy the Dip in Facebook Inc Stock Once Again

FB stock is available at a reasonable valuation

By Vince Martin, InvestorPlace Contributor

http://bit.ly/2zVJOqx

For over four years now, every dip in Facebook Inc (NASDAQ:FB) has presented a buying opportunity. And while past results are no guarantee of future performance, the 7% drop in the FB stock price over the past seven sessions looks like another opportunity.

Why It's Time to Buy the Dip in FB Stock Once Again
Source: Shutterstock

There are risks here. Investors have rotated out of big-cap tech of late, with Amazon.com, Inc. (NASDAQ:AMZN) and Alphabet Inc (NASDAQ:GOOGL) seeing similar declines. Reports of “fake news” on Facebook’s platform have raised regulatory concerns. And with the stock still up 49% year-to-date, some investors might see the FB stock price as too high, too soon.

But all stocks have some degree of risk. However, no other stock has:

  • A daily active user count equal to 18% of the entire world’s population
  • 50% operating margins
  • $38 billion in cash and no debt
  • Essentially no competition, with Twitter Inc (NYSE:TWTR) and Snap Inc (NYSE:SNAP) nowhere near in terms of users or importance

It’s a hugely compelling combination, and it’s available at a reasonable valuation. That valuation is even more reasonable after the recent pullback, and it’s enough to step in and buy FB stock.

A No News Drop

The 7% drop in the FB stock price is far from a plunge, admittedly. But it does appear to be the largest pullback in Facebook stock since October 2016.

And it’s worth pointing out that there really is no news driving the dip. Q3 earnings were impressive, though the market sold off FB stock amid concerns about higher spend going forward. Congressional investigations into “fake news” appear complete. That issue is taking a clear backseat to tax reform and other concerns.

Competition isn’t an issue, as Facebook remains the only social media stock that matters, as I wrote back in July. Snap’s Q3 earnings showed a continuing deceleration in user growth and little threat to Facebook, and I’m skeptical the redesign of the Snapchat app will change those trends.

Nothing’s changed. Investors may be taking some profits, with the FB stock price still up 50% YTD. There may also be some rotation out of index funds that hold the so-called “FANG stocks.”

In this market, those actions might make some sense in dearly valued stocks like Netflix, Inc. (NASDAQ:NFLX) (the “N” in “FANG”). But the fact remains that Facebook stock simply isn’t that expensive.

Buy the Dip in FB Stock

Backing out the aforementioned cash, FB stock still trades at about 24x EPS. I’ve made this comparison before, but that’s roughly the same multiple as The Coca-Cola Co (NYSE:KO).

In other words, Facebook, whose earnings still should grow 15%+ next year even with higher spending, is being valued the same as a challenged business with declining revenue. And Coke doesn’t have secondary businesses in the vein of Instagram or WhatsApp, neither of which Facebook has come close to yet monetizing.

In this market, Facebook stock simply is too cheap. And once the current pullback ends, the market will once again remember that fact. That’s the way it’s been for years now. Every time the FB stock price comes down, it goes back up, and then some. And there’s been no change in the Facebook business to suggest that this time will be any different.

As of this writing, Vince Martin has no positions in any securities mentioned.


Article printed from InvestorPlace Media, https://investorplace.com/2017/12/why-its-time-to-buy-the-dip-in-facebook-stock/.

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